Dimensional fund advisors is well-known for its unique investment philosophy and approach. The firm was founded in 1981 by David Booth and Rex Sinquefield, who believed in the power of market efficiency and passive investing. Over the decades, Dimensional has refined its philosophy and become a leader in applying academic research to practical portfolio management. Some core ideas of Dimensional’s investment philosophy include believing in market efficiency, diversification across dimensions of returns, and focusing on drivers of returns rather than market timing or security selection. The firm implements its philosophy through portfolios that target specific dimensions like size, value, and profitability. Dimensional also emphasizes the importance of low costs, discipline, and long investment horizons for client success. Its consistent application of these principles has allowed Dimensional to thrive and deliver excellent results to investors.
Markets are efficient and trying to outguess them is futile
Dimensional believes securities markets are highly competitive and efficient in aggregate. This means available information is already reflected in prices, making it difficult to systematically outperform. So rather than trying to find mispriced stocks or time the markets, the firm focuses on capturing dimensions of returns. Dimensional accepts that risk and return are related, so it constructs portfolios tilted toward dimensions associated with higher expected returns, like small cap and value stocks. But it does not make forecasted return assumptions.
Diversificationminimizes risks
Dimensional diversifies broadly across dimensions like company size, value, and profitability within asset classes like stocks and bonds. According to their research, factors have low correlations so combining multiple dimensions can reduce portfolio risk. And diversification makes Dimensional portfolios more robust since the performance of each dimension varies over time. Rather than concentrating risks in a few securities, Dimensional spreads risks systematically across a wide range of securities targeting different dimensions.
Focus on dimensions of higher expected returns, not individual securities
Dimensional portfolios target specific dimensions that academic research shows have higher expected returns. Securities are just vehicles for accessing the underlying dimensions. This contrasts with active managers who focus on finding misvalued individual stocks. Dimensional’s process is disciplined, transparent, and focused on dimensions rather than securities. So Dimensional is not concerned with predicting which securities will outperform.
Maintain discipline through rigorous research and portfolio management processes
Dimensional believes successful investing requires discipline, so it implements rules-based transparent processes founded on decades of rigorous academic research. For example, its portfolio managers adhere to precise frameworks for structuring and managing portfolios to capture targeted dimensions. And trading follows algorithmic rules designed to minimize costs. This systematic discipline aims to remove emotion and individual biases from decision making.
Keep costs low because compounding magnifies their impact
Dimensional recognizes that compounded returns and compounded costs have powerful effects over long horizons. So the firm meticulously focuses on keeping portfolio turnover and trading costs low. Dimensional also pays close attention to expense ratios, tax efficiency, and other costs shareholders incur. Minimizing costs preserves more of a portfolio’s return and allows the power of compounding to work over long periods.
In summary, Dimensional applies academic research in efficient markets, asset pricing, and portfolio design to offer investors practical equity and fixed income strategies focused on sources of higher expected returns. Its core ideas prioritize market efficiency, diversification, discipline, and cost minimization. Dimensional targets dimensions rather than individual securities and stays disciplined to these principles.